AS Klaveness Chartering v Pioneer Freight Futures Co Ltd & Anor

Neutral Citation Number: [2009] EWHC 3386 (Comm) IN THE HIGH COURT OF JUSTICE QUEEN'S BENCH DIVISION COMMERCIAL COURT Claim No: 2009 Folio 233 Claim No. 2009 Folio 976 Royal Courts of Justice Strand, London, WC2A 2LL Date: 18/12/2009 Before : MR JUSTICE CHRISTOPHER CLARKE - - - - - - - - - - - - - - - - - - - - - Between : AS KLAVENESS CHARTERING - and - Claimant (1) PIONEER FREIGHT FUTURES CO., Defendants (2) PIONEER METALS CO., LTD LTD - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Mr Timothy Hill QC and Mr Henderson (instructed by Bentleys Stokes & Lowless) for the Claimant Hearing dates: Monday 14th December 2009 - - - - - - - - - - - - - - - - - - - - - Judgment Mr Justice Christopher Clarke : 1. 2. 3. 4. 5. 6. This is a claim by AS Klaveness Chartering (“Klaveness”), for sums said to be due under a number of forward freight agreements (“FFA contracts”) between it and Pioneer Freight Futures Co (“PFF”), the first defendant; and against Pioneer Metals Ltd (“PM”), the second defendant under a contract of guarantee whereby PM guaranteed PFF’s performance of, inter alia, the FFA contracts up to US$10 million. Both defendants were previously represented by solicitors and counsel. At about 1800 on the Friday before the trial, which began on Monday 14th December, the defendants’ solicitors, Messrs Clyde & Co, having sought an adjournment from Klaveness’ solicitors, which was refused, indicated that they were without instructions and that the defendants would not be represented. The defendants have neither appeared nor adduced any evidence. I have, however, thought it right to consider the witness statements of Mr Chen filed by PFF in coming to my conclusions1. Klaveness is a Norwegian corporation which is engaged in the business of chartering vessels. PFF is not so engaged but it was one of the largest traders in FFA contracts. Although it is incorporated in the British Virgin Islands, it is Chinese owned and its personnel operate from Beijing. PM is incorporated in Hong Kong. The guarantee On 7th June 2006 PM entered into a guarantee (“the Guarantee”), under which it guaranteed to Klaveness the due and faithful performance by PFF of all of its liabilities and responsibilities under the “Agreements”, including the due and punctual performance of the Agreements and the prompt payment of any sums from time to time due, whether by acceleration or otherwise, from PFF to Klaveness. Clause 3 provided that payment under the Guarantee should be made promptly upon receipt by PM of a written demand by PFF to PM’s address or fax number stating the circumstances of the default by PFF and the amount demanded (not to exceed the Balance Due). The definition of “Agreements” was wide enough to cover the FFA contracts in suit. The FFA contracts Between 27th June 2006 and 18th September 2008 Klaveness and PFF entered into 20 FFA contracts. Each of them was subject to the 1992 version of the (Multicurrency- Cross Border) Master Agreement of the International Swap Dealers Association Inc. (“the Master Agreement”); and each of those 20 contracts was a “Confirmation” for the purpose of that Agreement. On 17th September 2008 Baumarine A/S entered into a single FFA contract with PFF. Baumarine is a company related to Klaveness but with a different beneficial ownership. That contract was also subject to the Master Agreement. 1 Despite the fact that no notice in respect of them has been served under Part 33; and they have not been put in by PFF as statements. 7. In the 20 contracts PFF was sometimes the Seller and sometimes the Buyer and Klaveness was sometimes the Buyer and sometimes the Seller. The contracts specified the Contract Route, Rate, Quantity, Month and Settlement Date. Thus, to take an example, in one case PFF was the Seller; the Contract Route was BPI TC as defined by the Baltic Exchange on the Contract Date (or a replacement or substitute route published by the Baltic Exchange); the Contract Rate was $ 48,500 per day; the Contract Quantity was 15 days in each of the months from October to December 2008; and the Settlement Dates were the last Baltic Exchange Index publication days of each Contract Month. 8. The FFA contracts provided: “6 Settlement Rate (a) Each settlement rate (the “Settlement Rate”) shall be the unweighted average of the rates for the Contract Route(s) published by the Baltic Exchange over the Settlement Period (defined as All Baltic Exchange Index publication days of the applicable Contract Month up to and including the Settlement Date) Settlement Sum The “Settlement Sum” is the difference between the Contract Rate and the Settlement Rate multiplied by the Quantity by Contract Month. If the Settlement Rate is higher than the Contract Rate, the Seller shall pay the Buyer the Settlement Sum. If the Settlement Rate is lower than the Contract Rate, the Buyer shall pay the Seller the Settlement Sum. Payment Procedure and Obligations (a) Payment of the Settlement Sum is due on the later of two (2) London business days after presentation of payee’s invoice (with complete payment instructions) or five (5) London business days after the Settlement Date and for this purpose a “London business day” means a day (other than a Saturday or Sunday) on which commercial banks are open for business in London. The Settlement Sum will be deemed “paid” when it has been received into the bank account designated by the payee. (b) Payment of the Settlement Sum shall be made telegraphically, in full, in United States dollars. The costs incurred in effecting payment shall be for the account of the payer. Payment may only be effected directly between the parties. The Settlement Sum shall be paid without any deduction or set-off except as permitted pursuant to the Master Agreement or otherwise as agreed by the Buyer and the Seller in writing. ISDA Master Agreement ….. This Confirmation constitutes and incorporates by reference the provisions of the 1992 ISDA Master Agreement (Multicurrency – Cross Border) (without Schedule) as if they were fully set out in this Confirmation and with only the following specific modifications and elections: Section 2(c)(ii) shall not apply so that a net amount due will be determined in respect of all amounts payable on the same date in the same currency in respect of two or more Transactions. …. For the purposes of payments on Early Termination, Loss will apply and the Second Method will apply; (f) Automatic Early Termination will apply to both parties. Non-Assignability Except as provided in Section 7 of the Master Agreement, this Confirmation is non-assignable unless otherwise agreed in writing between the parties to this Confirmation.” 9. The Master Agreement contained the following provisions: Interpretation “1 …. Single Agreement. All Transactions are entered into in reliance on (c) the fact that this Master Agreement and all Confirmations form a single agreement between the parties (collectively referred to as this “Agreement”), and the parties would not otherwise enter into any Transactions. 2. Obligations (a) General Conditions (i) Each party will make each payment or delivery specified in each Confirmation to be made by it, subject to the other provisions of this Agreement. …… (iii) Each obligation of each party under Section 2(a) (i) is subject to (1) the condition precedent that no Event of Default or Potential Event of Default with respect to the other party has occurred and is continuing …… …… (c) Netting: If on any date amounts would otherwise be payable:- (i) in the same currency; and (ii) in respect of the same Transaction2, by each party to the other, then, on such date, each party’s obligation to make a payment of any such amount will be automatically satisfied and discharged and, if the aggregate amount that would otherwise have been payable by one party exceeds the aggregate amount that would otherwise have been payable by the other party, replaced by an obligation upon the party by whom the larger aggregate amount would have been payable to pay to the other party the excess of the larger aggregate amount over the smaller aggregate amount 5. Events of Default and Termination Events (a) Events of Default. The occurrence at any time with respect to a party …… of any of the following events constitutes an event of default (an “Event of Default”) with respect to such party:- (i) …… (vii) Failure to Pay or Deliver. Failure by the party to make, when due, any payment under this Agreement or delivery under Section 2(a)(i) or 2(e) required to be made by it if such failure is not remedied on or before the third Local Business Day after notice of such failure is given to the party; Bankruptcy. The party, any Credit Support Provider of such party or any applicable Specified Entity of such party:- (1) is dissolved… (2) becomes insolvent or is unable to pay its debts or fails or admits in writing its inability generally to pay its debts as they become due; (3) makes a general assignment, arrangement or composition with or for the benefit of its creditors; (4) institutes or has instituted against it a proceeding seeking a judgment of insolvency or bankruptcy or any other relief under any bankruptcy or insolvency law or other similar law affecting creditors’ rights, or a petition is presented for its winding-up or liquidation, and, in the case of any such proceeding, or petition instituted or presented against it, such processing or petition (A) results in a judgment of insolvency or bankruptcy or the entry of an order for relief or the making of an order for its winding-up or liquidation or (B) is not dismissed, discharged, stayed or restrained in each case within 30 days of the institution or presentation thereof; (5) has a 2 It is this subsection which is disapplied by the terms of the FFA contracts so as to permit set off between more than one Transaction. resolution passed for its winding-up, official management or liquidation (other than pursuant to a consolidation, amalgamation or merger); (6) seeks or becomes subject to the appointment of an administrator, provisional liquidator, conservator, receiver, trustee, custodian or other similar official for it or for all or substantially all its assets; (7) has a secured party take possession of all or substantially all its assets or has a distress, execution, attachment, sequestration or other legal process levied, enforced or sued on or against all or substantially all its assets and such secured party maintains possession, or any such process is not dismissed, discharged, stayed or restrained, in each case within 30 days thereafter; (8) causes or is subject to any event with respect to it which ,under the applicable laws of any jurisdiction, has an analogous effect to any of the events specified in clauses (1) to (7) (inclusive)…” Early Termination (a) Right to Terminate Following Event of Default. If at any time an Event of Default with respect to a party (the “Defaulting Party”) has occurred and is then continuing, the other party (the “Non-defaulting Party”) may, by not more than 20 days notice to the Defaulting Party specifying the relevant Event of Default, designate a day not earlier than the day such notice is effective as an Early Termination Date in respect of all outstanding Transactions. If, however, “Automatic Early Termination” is specified in the Schedule as applying to a party, then an Early Termination Date in respect of all outstanding Transactions will occur immediately upon the occurrence with respect to such party of an Event of Default specified in Section 5 (a)(vii)(1), (3), (5), (6) or, to the extent analogous thereto, (8), and as of the time immediately preceding the institution of the relevant proceeding or the presentation of the relevant petition upon the occurrence with respect to such party of an Event of Default specified in Section 5(a)(vii)(4) or, to the extent analogous thereto, (8). (c) Effect of Designation. (i) (ii) If notice designating an Early Termination Date is given under Section 6(a) or (b), the Early Termination Date will occur on the date so designated, whether or not the relevant Event of Default or Termination Event is then continuing. Upon occurrence or effective designation of an Early Termination Date, no further payments or deliveries under Section 2(a)(i) or 2(e) in respect of the Terminated Transactions will be required to be made, but without prejudice to the other provisions of this Agreement. The amount, if any, payable in respect of an Early Termination Date shall be determined pursuant to Section 6(e). (d) Calculations. (i) Statement. On or as soon as reasonably practicable following the occurrence of an Early Termination Date, each party will make the calculations on its part, if any, contemplated by Section 6(e) and will provide to the other party a statement (1) showing, in reasonable detail, such calculations (including all relevant quotations and specifying any amount payable under Section 6(e)) and (2) giving details of the relevant account to which any amount payable to it is to be paid. In the absence of written confirmation from the source of a quotation obtained in determining a Market Quotation, the record of the party obtaining such quotation will be conclusive evidence of the existence and accuracy of such quotation. (ii) Payment Date: An amount calculated as being due in respect of any Early Termination Date under Section 6(e) will be payable on the day that notice of the amount payable is effective (in the case of an Early Termination Date which is designated or occurs as a result of an Event of Default)… (e) Payments on Early Termination. If an Early Termination Date occurs, the following provisions shall apply based on the parties’ election in the Schedule of a payment measure, either “Market Quotation” or “Loss”, and a payment method either the “First Method” or the “Second Method”3. If the parties fail to designate a payment measure or payment method in the Schedule, it will be deemed that “Market Quotation” or the “Second Method”, as the case may be, shall apply. The amount, if any, payable in respect of an Early Termination Date and determined pursuant to this Section will be subject to any Set-off. (4) Second Method and Loss. If the Second Method and Loss apply, an amount will be payable equal to the Non-defaulting Party’s Loss in respect of this Agreement. If that amount is a positive number, the Defaulting Party will pay it to the Non- defaulting Party; if it is a negative number, the Non-defaulting Party will pay the absolute value of that amount to the Defaulting Party. Transfer Subject to Section 6(b) (ii) neither this Agreement nor any interest or obligation in or under this Agreement may be transferred (whether by way of security or otherwise) by either party without the prior written consent of the other party, except that:- a party may make such a transfer of this Agreement pursuant to (a) a consolidation or amalgamation with, or merger with or into, or 3 The FFA contracts opted for “Loss” and the “Second Method”. transfer of all or substantially all its assets to, another entity (but without prejudice to any other right or remedy under this Agreement); and a party may make such a transfer of all or any part of its (b) interest in any amount payable to it from a Defaulting Party under Section 6(e) Miscellaneous …… Amendments. No amendment, modification or waiver in respect of this Agreement will be effective unless in writing (including a writing evidenced by a facsimile transmission) and executed by each of the parties or confirmed by an exchange of telexes or electronic messages on an electronic messaging system. (b) …… 14 Definitions “Loss” means, with respect to this Agreement or one or more Terminated Transactions, as the case may be, and a party, the Termination Currency Equivalent of an amount that party reasonably determines in good faith to be its total losses and costs (or gain, in which case expressed as a negative number) in connection with this Agreement or that Terminated Transaction or group of Terminated Transactions, as the case may be, including any loss of bargain, cost of funding or, at the election of such party but without duplication, loss or cost incurred as a result of its termination, liquidating, obtaining or re-establishing any hedge or related trading position (or any gain resulting from any of them). Loss includes losses and costs (or gains) in respect of any payment or delivery required to have been made (assuming satisfaction of each applicable condition precedent) on or before the relevant Early Termination Date and not made, except, so as to avoid duplication, if Section 6(e)(i)(1) or (3) or 6(e)(ii)(2)(A) applies. Loss does not include a party’s legal fees and out-of-pocket expenses referred to under Section 11. A party will determine its Loss as of the relevant Early Termination Date, or, if that is not reasonably practicable, as of the earliest date thereafter as is reasonably practicable. A party may (but need not) determine its Loss by reference to quotations of relevant rates or prices from one or more leading dealers in the relevant markets. “Potential Event of Default” means any event, which, with the giving of notice or the lapse of time or both, would constitute an Event of Default.” Events at the end of 2008 10. In the second half of 2008 the freight market slumped dramatically. It became apparent to the parties that, although Klaveness would owe sums to PFF in respect of December, PFF would owe very much larger sums to Klaveness in respect of January 11. 12. 13. 14. and beyond. The obligation of PFF to make such payments would badly affect its cash flow in circumstances where the potential inability of PFF’s debtors to pay PFF was likely to deprive it of cash with which to make payment of what it owed. A potential solution was at hand. Duferco Shipping SA (“Duferco”) was a very creditworthy counterparty of PFF, which would owe it large sums under trades maturing from January onwards (estimated by Klaveness at about $ 25 million). The FFAs precluded any assignment by PFF of its rights against Duferco. But it would be possible to novate PFF’s contracts with Duferco so that Klaveness took PFF’s place. This would (on the assumption that the Duferco – PFF contracts were, so far as material, in the same form as the Kaveness-PFF contracts) be of some benefit to Duferco since, if PFF were unable to pay its debts, there was a risk of an Automatic Early Termination, which would generate an immediate obligation on Duferco’s part to pay “Losses”. The solution would involve Klaveness exchanging an obligation on the part of PFF to pay it in the future sums totalling about $ 30 million for obligations on the part of Duferco of lesser value. It would thus, in the jargon, be having a “haircut”. But it would have the advantage of a counterparty which was less likely to default. 18th December 2008 Negotiations took place between Mr Preben Richter, Klaveness’ trading manager, and Mr Chen Yang (Eddie Chen) of PFF, who was responsible for all its back office operations. The upshot was that by an e-mail of Thursday 18th December 2008 from Mr William L’Orange, who had overall responsibility for Klaveness’ FFA contracts, to Mr Chen, Klaveness informed PFF that it had decided to accept a proposal that had been put forward at a meeting in Milan the previous day whereby Klaveness would agree to novate the position between PFF, Duferco and Klaveness for 2009 and 2010 in line with a draft novation agreement which was then in existence, and Klaveness would cancel all rights and obligations outstanding as between PFF, Klaveness and Baumarine. That offer was expressed to be conditional on all agreements being completed and signed by close of business Oslo time on Tuesday 23rd December. In the e-mail Mr L’Orange said that PFF must start immediately (a) to contact Duferco that day to inform them of PFF’s desire to do the novation; and (b) to instruct its lawyers to start drafting and discussing changes to the draft agreements proposed by Klaveness with Klaveness’ lawyer. He also said that three agreements needed to be in place (i) a novation agreement PFF/Duferco/Klaveness; (ii) a close out agreement between Klaveness and PFF; and (ii) an agreement between PM and Klaveness where PM guaranteed that PFF was solvent at the time of signing the agreement and the return of the Guarantee. He indicated that the agreements should be completed by Monday 22nd December and signing should take place the next day. 19th December On Friday 19th December Mr Chen replied saying that PFF accepted this proposal. He said that he had instructed his lawyer to draft the contract which should be available during the weekend. Mr L’Orange e-mailed back to say that he was glad to hear that “we have reached an agreement on commercial terms and the timing aspects”. He said that Klaveness’ lawyer would be available during the weekend and expected that PFF’s lawyer would still be Mr Derek Chalmers of Clyde & Co. He asked Mr Chen to inform him once he had spoken to Duferco regarding the netting so that the process could be concluded with them during the same timeframe. A little later Mr Chen e- mailed a Mr Carruba of Duferco to confirm that PFF had agreed to novate all existing contracts with Duferco to Klaveness and saying that Klaveness would contact him soon “with novation contract”. Then Mr Chen replied to Mr L’Orange to say that Mr Chalmers was on vacation but that his colleague would step up to resume his work during his vacation. He expressed the view that “Since Klaveness has side deal with Duferco, it might be more appropriate that Klaveness talk to Duferco for this matter”. 22nd/23rd December 15. 16. 17. No agreements were forthcoming either over the weekend or on Monday 22 nd or Tuesday 23rd. The reason for requiring completion by Tuesday 23rd was that Wednesday 24th was the Settlement Date for December. The basis of the proposed deal was that the December Settlement would be “washed out” in the novation agreement i.e. PFF would not be entitled to receive anything in respect of December nor bound to pay anything in respect of the January (or subsequent) months and Klaveness would step into PFF’s shoes vis-à-vis Duferco in respect of December and beyond. 24th December On 24th December the Settlement Sums under the various FFA contracts in respect of December were such that $ 702,997.31 was owed by Klaveness and $ 679,836.24 by Baumarine to PFF. Under the terms of the FFAs these sums were due on 5th January 2009. The telephone conversation on 30th December On 30th December 2008 Ms Bless Lee, who was in the back office of PFF, e-mailed to the brokers an invoice to Klaveness for $ 702,997.31. Since the novation deal was intended to have the effect that the net December Settlement Sum was not payable Klaveness was surprised to receive it. 18. Mr Richter telephoned Mr Chen. His account of that conversation was as follows: “We discussed two matters. First, when the draft agreements would be provided by PFF’s lawyers. Second, what was to happen in relation to the December settlement. It had been intended that the agreements should be completed and signed by 23 December 2008. This had not happened but Mr Chen assured me that from PFF’s point of view the deal was still on The December Settlement was going to be washed out in the proposed novation agreement. Mr Chen and I therefore agreed that the settlement for December 2008 in the sum of US $1,382,833.56 otherwise payable by Klaveness and Baumarine to PFF would not take place pending conclusion of the novation agreement. Mr Chen and I did not discuss what would happen in respect of the December Settlement if the novation agreement did not in fact go ahead. This is because we both assumed it would and that the December Settlement would be subsumed with the overall settlement and cancelled together with all other obligations between Klaveness, Baumarine and PFF in accordance with the terms of the original commercial agreement that had been previously discussed.” 19. In paragraph 20 of his second statement Mr Chen accepts that it was agreed that the novation would include the December Settlement Sum but says that he cannot remember expressly agreeing that the settlement for December would not take place pending the conclusion of the novation. He says that it was his understanding that: “We were both working on the novation deals and that if the deal was concluded the December payment would be netted off as part of the deal. It would therefore be fair to say that it was implicitly agreed that I would not chase for the December payment whilst these discussions were ongoing”. 20. 21. 22. 23. I am quite satisfied that there was an explicit discussion about the December payment. The whole reason for Mr Richter’s call was to deal with the invoice which had, unexpectedly, demanded payment of the December Settlement Sums; it is most unlikely that Mr Richter and Mr Chen did not talk in terms about the December Settlement. I am also satisfied that the agreement was that the Settlement for December would not take place pending the conclusion of the novation agreement. I reach that conclusion for two reasons. Firstly, having seen him, I regard Mr Richter as an honest and reliable witness and as someone not prepared to say anything he could not really support. Secondly, the basis of the proposed deal, which Mr Chen was confirming was “still on” was that if the novation took place the December Settlement Sums would not be payable. If the December Settlement was to be payable the deal would, as Mr Chen knew, either go off or, at any rate, would have to be renegotiated. In those circumstances the likelihood is that the agreement was that, pending the novation, the December Settlement would not take place since that is (a) what Klaveness would require; and (b) the result that the novation deal was intended to secure. It seems to me unlikely that matters were left on the basis that the December Settlement was to be due but PFF would not chase it. There was sufficient consideration for this agreement in Klaveness’ continued preparedness to continue negotiating the proposed novation deal and the keeping open of that deal which would be of considerable benefit for PFF. PFF would contend that, if there was such an agreement it amounts to an amendment, modification or waiver of the Master Agreement and must, in order to be effective be in writing : see section 9 (b). I do not accept this. It seems to me that the agreement made during the conversation on 30th December may properly be regarded as a contract collateral to the Master Agreement. It was not an agreement which had any continuing effect in relation to the Master Agreement. It was a one-off arrangement for a temporary suspension of the December Settlement. There is authority that a contract which is collateral to a contract which is required to be in writing does not itself have to be in writing. Angell v Duke (1875) L. R. 10 QB 174; City of Westminster Properties v Mudd [1959] Ch 129; Record v Bell [1991] 1 WLR 853; Chitty on Contracts, (30th ed., 2008), paragraphs 12-103 and 22-036. 24. 25. 26. 27. 28. I do not, however, accept that the combination of the cure notice and the exchange of e-mails on 12th and 13th January can be regarded as a confirmation of a modification by “an exchange of …electronic messages on an electronic messaging machine”. Those documents are consistent with the agreement that was made but they are not, to my mind, a confirmation of the actual agreement made. In the light of that agreement it is necessary to consider when the December Settlement would become payable, assuming that there was no novation as envisaged (as turned out to be the case). The parties did not reach any express agreement on this question. But it seems to me that it was their obvious intention that, if the novation agreement was not to be made, PFF would be entitled to give Klaveness and Baumarine reasonable notice, which could be quite short, to make payment of the December Settlement Sums. It cannot have been their intention that Klaveness and Baumarine should be in immediate default in respect of the December Settlement without any notice once some undefined point had arisen at which it could be said that the negotiations for the novation had gone off (a matter capable of much dispute). No hardship would be involved in requiring such a notice nor would such a notice conflict with the basic understanding that the December Settlement would not be payable whilst the contract of novation was in negotiation. If PFF gave such a notice it would be signifying that it did not intend to go ahead with the deal proposed which assumed that the December contracts were novated. If that conclusion is too bold a result to reach by a process of implication it seems to me that the same result may be achieved by application of the principles of equitable forbearance. The effect of what was discussed and agreed on 30th December was that PFF unequivocally represented that the normal operation of the FFA contracts in respect of December, including in particular the obligation to make payment, was to be suspended and that it was not going to require payment of the December Settlement Sums in accordance with the Master Agreement and the FFA contracts. Klaveness relied on that representation by not paying PFF’s invoice in respect of the December Settlement. If that non payment is to be relied on as an Event of Default or a Potential Event of Default, Klaveness will have acted to its detriment. It would be inequitable to allow PFF now to resile from its representation. PFF was entitled to bring its forbearance to an end on reasonable notice; but it never did so. It is no matter that the Master Agreement required any amendment or modification to be in writing. It is not necessary that any forbearance to enforce should be in writing in order for equitable principles to apply: MSAS Global Logistics v Power Packaging Inc. [2003] EWHC 1393 (Ch). No notice was ever given by PFF so that the December Settlement Sums did not become due. In any event, as we shall see, the question as to whether the December Settlement Sums were payable was overtaken by events. The cure notices of 6th January 2009 On 6th January 2009 i.e. the day after the December Settlement Sums would have been due PFF served two notices under clause 5(a) (i) of the Master Agreement (“cure notices”) requiring payment within 3 London Business Days of $ 702,997.31 under the Klaveness/PFF contracts and $ 679,836.24 under the Baumarine/PFF contracts. These notices were signed by Mr Chen. They were received by Klaveness on Friday 9th January 2009. 29. On 12th January Mr Richter e-mailed Mr Chen: “I was surprised to receive your letter of 6th January to Baumarine and [Klaveness] regarding payment of December settlement. We have agreed that the novation between Duferco/PFF/Klaveness will cancel all obligations between Baumarine/Klaveness and PFF. We are still awaiting draft agreement from your lawyers which you on several occasions have promised to produce and send to us. We look forward to receive your draft agreements for the novation agreement.” 30. On 13th January Mr Chen replied: “I am sorry for the mistake that the Bank office made. They didn’t know the deals we are talking. The contract should be ready today according to my lawyer.” “Bank office” is an obvious misprint for “back office”. 31. 32. If the cure notices of 6th January were effective there was an Event of Default in relation to both the Klaveness and Baumarine contracts on Thursday 15th January. Such an Event arises if a failure to pay has not been remedied on or before the third Local Business Day after notice of such failure is given. Since the notice reached Klaveness on Friday 9th the three days thereafter were Monday – Wednesday 12th - 14th; and any default would have been on the 15th. I am quite satisfied that the notices of 6th January were not effective. Even if the December Settlement Sums were due on 5th January (which they were not: see paras 20 ff above) the effect of Mr Chen’s e-mail of 13 th January was to represent to Klaveness that the cure notices were a mistake and were not therefore to be taken as having their apparent effect. If X tells Y that a notice that he has previously sent is a mistake then, in the absence of any indication to the contrary, he must be regarded as not seeking to rely on a notice which he has proclaimed to be an error. Klaveness relied on that representation by not paying the December Settlement Sum or taking any step to clarify the position and, if necessary, altering the terms of the negotiations about novation. It is not open to PFF to resile from it now. Monday 19th January 33. At 0814 Norwegian time, 0714 London time, Mr Richter e-mailed Mr Chen complaining that it was now more than a month since the novation had been agreed on and pointing out that Klaveness was still waiting for the documentation which he had promised to send on several occasions. He ended by saying: “If this deal is to be concluded we have to have an agreement signed by all three parties within 31 January. If not, we expect a timely settlement according to the terms set out in FFABA 2007”. 34. At 13.17 Norwegian time, 13.17 London time, Mr Chen forwarded to Clyde & Co the sequence of e-mail correspondence consisting of Mr Orange’s e-mail of 18 th December, Mr Chen’s reply of 19th December and Mr Orange’s reply e-mail to Mr Chen of the same day: see paras 11-13 above. The forwarding e-mail read: “Below is the commercial terms I agreed with Klaveness. I need your help to put together the contract asap.”” It went on to say that there should be three contracts (i) the novation contract; (ii) an agreement between Klaveness and PM to cancel the Guarantee; and (iii) a settlement agreement with Baumarine. I infer from this that, contrary to the impression given by Mr Chen, PFF had no taken any steps after 19th December to instruct its solicitors to draw up the contractual documentation. This was either through inertia, which seems to me somewhat unlikely, or, as seems to me more likely, because PFF hoped to obtain a more favourable deal by a novation of the Duferco contracts in favour of someone else so as to effect a bigger “haircut” by using the Duferco contracts to buy off an even greater future indebtedness. It is unnecessary to make any specific finding and, in the absence of Mr Chen, I do not do so. 21st January At 1339 London time Clyde & Co e-mailed to Mr Chen draft documents for review and consideration. At 1723 Norwegian time Mr Chen e-mailed the three draft agreements to Mr Richter. On 26th January Mr Chetwood of Bentley Stokes, who had been instructed by Klaveness and had received the documents, e-mailed Mr Chalmers of Clyde & Co with some comments on the drafts. 35. 36. 37. 28th January 38. On 28th January at 0959 Norwegian time Mr Richter e-mailed Mr Chen to say: “Unfortunately the time we have spent on getting the agreements ready has had some unwanted and unexpected consequences. Duferco has re-thought the whole deal and is now trying to see if there are other potential parties for novation. In order to get our agreement signed we need your support with Duferco. Could you please contact Duferco and put pressure on them to sign the agreement. I think it is important to make a point that there are no other potential novation parties. As time is running out towards our deadline we need to have a joint effort towards Duferco” 39. On the same day Mr Chalmers indicated that in principle he had no objection to Mr Chetwood’s proposed amendments. 29th January 40. Mr Chen replied to Mr Richter’s e-mail of 28 th January saying that he had sent an e- mail to Duferco on that day. This e-mail has not been disclosed. 30th January 41. 42. 43. Friday 30th January was the Settlement Date for the January contracts. On that day Mr Richter e-mailed Mr Espen Stange, who was employed in Klaveness’ back office, to tell him that Klaveness would be sending the settlement advice for January to PFF as normal and that the withheld settlement for December in respect of both Klaveness and Baumarine was to be deducted from the due amount. 2nd February On 2nd February Mr Richter telephoned Mr Chen to ask whether he had received an answer back from Duferco. Mr Chen said he had not. He agreed to call Mr Francesco Caruba of Duferco and Mr Richter e-mailed to Mr Chen Caruba’s contact details 3rd February In the morning of 3rd February Mr Stange e-mailed to Mr Chen an invoice in respect of the January 2009 Settlement and advised him that the due date for payment was Friday 5th January. That date was a mistake for 6th February which he corrected an hour later. The invoice specified $ 4,564,840.81 as due for January and gave credit for the $ 702,997.31 due from Klaveness for December, making $ 3,861,843.50. It did not, however, give credit for the amount due from Baumarine. 44. On the same day Bless Lee of PFF sent to the brokers a credit note in the sum of $ 4,564,840.81. which the brokers passed on to Klaveness later that day. 45. In the afternoon of the same day Mr Richter e-mailed Mr Chen to say: “Unfortunately our joint effort on getting Duferco back on track on the novation agreement doesn’t seem to have succeeded so far. We do hope that they will come back so we can sign the novation agreement. However, we don’t see that this will happen within the next few days. Under these circumstances we will have to modify the agreement by running January settlement as normal i.e. PFF shall be paid by Duferco under the existing contracts and Klaveness shall be paid by PFF under the existing contracts. We will of course deduct the December settlement amount from Baumarine and Klaveness Chartering from the January settlement…,” ” Let me point out that Klaveness is still very keen to implement the novation agreement with Duferco/PFF but the terms will have to be slightly changed to include the period from February onwards. That also means that some of the documentation has to be slightly changed. However, I think that the most important thing now is to get Duferco back in the game and get them to sign the novation documents”. [Bold added] 5th February 46. At some time on 5th February Mr Richter called Mr Chen to assure him that Klaveness was still interested in concluding the novation from February onwards. The exact time of this conversation is unknown. Mr Richter told me that he thought that it was before lunch Oslo time i.e. before noon and, in my judgment, he is likely to be right about this. His evidence was that after he had given this assurance: “…Mr Chen then indicated that he wished to “skip” the January Settlement and wanted to conclude the novation agreement with Duferco. I replied that skipping the January Settlement was out of the question and that the January Settlement had to be paid by PFF. Mr Chen explained that as a result of: (i) a claim of approximately US$50 million from a third party; and (ii) difficulties in collecting payments from other third parties, that it was going to be problematic to obtain the cash necessary for the January Settlements. It was plain to me that he was saying that PFF did not have the money to make the January Settlement. I replied that skipping the January Settlement was out of the question and that the January Settlement had to be paid by PFF. I said that Klaveness would of course give credit for the December Settlement due to PFF. I confirmed that, on this basis, Klaveness would still be interested in a novation for February 2009 onwards. Mr Chen replied “OK”. 47. 48. At 1051 London time, 1151 Norwegian time, Bless Lee of PFF e-mailed the brokers asking them “urgently [to] send us the settlement invoice of Klaveness”. At almost exactly the same time, namely 1154 Norwegian time, Mr Stange of Klaveness e- mailed to Mr Chen an amended settlement invoice for January 2009, pointing out that the due date was the next day - February 6th. That invoice gave credit for both the Klaveness and Baumarine December Settlement Sums. At 1237 Norwegian time the brokers forwarded to Klaveness Bless Lee’s e-mail of 1051 London time and asked Klaveness to send its January invoice for PFF. At 1240 Norwegian time Mr Stange dealt with that request by forwarding to Bless Lee the e- mail he had already sent to Mr Chen at 1154 Norwegian time. 49. Mr Chen’s evidence in relation to the conversation with Mr Richter is this: “I don’t recall the exact details of the conversation, and I don’t remember whether he referred to giving credit for the December settlement. If he did, I am confident that I did not agree to it – that would have stuck in my mind and I would have issued orders to my back office to withdraw the cure notice had I reached such an agreement. As stated, the focus of the discussion was the novation agreement, from my side, and I think that must have been what I was referring to when I said “ok”. I certainly was not agreeing to net the December settlement if there was no novation.” Conclusion in respect of the 5th February conversation 50. I am satisfied that Mr Richter’s evidence as to the 5th February conversation is reliable and that it was agreed between him and Mr Chen that the January settlement was to be paid less a deduction of the December Settlement. Klaveness was understandably not prepared to forego what was due to it under the January Settlement in circumstances where none of the Duferco contracts had been novated. On the footing that the January Settlement Sums were due on the next day it was in PFF’s interest that there should be a netting off. It was that netting off, offered in Mr Richter’s letter of 3 rd February and, in effect, confirmed in the oral conversation on 5th, to which, when he said “OK”, Mr Chen agreed. I do not find it credible that Mr Chen did not focus on the proposal for set off. Further, he did not need to say “OK” to Mr Richter’s indication that Klaveness was still interested in concluding the novation. 51. Mr Chen says that, if he had agreed to the set off, he would have issued orders to his back office to withdraw the cure notice. But there was no need for him to have done so. He had already said that it was a mistake. 52. My conclusion that such an agreement was made is supported by what happened, as I find, afterwards. At 1151 Norwegian time Bless Lee asked the brokers for a settlement invoice. At 1154 Mr Stange of Klaveness sent Mr Chen an amended settlement invoice for January giving credit for both December amounts. At 1240 Mr Stange forwarded to Bless Lee what he had sent to Mr Chen at 1154. 53. 54. It is possible that Mr Stange sent the revised invoice to Mr Chen because he had belatedly realised that his original invoice for January did not give credit for both December amounts as called for by Mr Richter’s e-mail of 30 th January. In his statement Mr Stange says that he certainly does not remember deciding that the invoice should be amended of his own initiative, and that, if he had, he would remember that. Nor does he remember any specific request from PFF. He thinks that the probable reason for his sending out the revised invoice was that he had received a telephone call from PFF asking for an amended invoice. The likelihood is that, Mr Chen and Mr Richter having agreed that the January Settlement would be made less a credit for the amounts due under the December Settlement, PFF was keen to have an invoice which gave credit for both amounts and, accordingly someone – either Mr Chen or someone else – contacted Mr Stange to request such an invoice. That conclusion tallies with the fact that Mr Strange asked for Mr L’Orange’s authority to issue the revised invoice – something that he is not very likely to have done if what he was doing was correcting a mistake that he had realised he had made in not giving effect to an instruction he had already been given. That request, itself, would, in the circumstances, amount to an acceptance of the offer to set off the two December amounts. Bless Lee’s request for an invoice is likely also to have been a result of the agreement that had been made. PFF would have been keen to have a record that the amount claimed gave credit for both December amounts. That agreement was, in my judgment, an agreement in writing for the purposes of Clause 8 (b) of the FFA contracts (“shall be paid without any deduction or set-off except as permitted pursuant to the Master Agreement or otherwise as agreed by the Buyer and the Seller in writing”) since the relevant terms were contained in the e-mail of 3rd February. The acceptance of the offer was not required to be in writing: see by analogy Zambia Steel & Buildings Supplies Ltd. v James Clark & Eaton Ltd. [1986] 2 Lloyd’s Rep. 225 where it was held that a quotation incorporating an arbitration clause on its back could constitute an “agreement in writing to refer disputes to arbitration” within the meaning of the Arbitration Act 1975 even though the assent to the quotation was oral. If that be incorrect it seems to me that the agreement made on 5 th February may properly be regard as a collateral contract and effective as such: see the authorities cited at para 23 above. In any event the content of the conversation on 5th February together with the request for a revised invoice, its dispatch and acceptance without demur, coupled with the absence of any claim that Klaveness should be paying the December amounts constituted a clear representation that PFF accepted that Klaveness had a right to set off whatever clause 8 (b) of the FFA contracts said. Klaveness relied on that by not paying and by proceeding on the basis that PFF was satisfied with the setting off arrangement. PFF cannot be allowed to resile from its representation in circumstances where Klaveness can no longer pay the December Settlement Sum prior to 6th February. Such a payment, if it had been made, would have meant that, on the assumption that the December Settlement Sums were due, there was no longer any Potential Event of Default. 6th February – non payment Friday 6th February was the day when the January Settlement Sums became due, being 5 London business days after Friday 31st January. In the light of the agreement for set off what should have been paid by PFF was $ 3,182,007.25. That sum was not paid. The sequel On 9th February Klaveness served a cure notice on PFF by courier calling for payment of $ 3,861,843, being the amount due from it for January less the amount to it from Klaveness for December. It also served a demand on PFF for the same sum under the Guarantee. On 10th February Mr Chen told Mr Richter in a telephone conversation that PFF had collected only about 10% of its January receivables and was chasing counterparties and paying out as money came in. By a letter of 13th February Klaveness designated the date of receipt of its letter (which was 13th February) as an Early Termination Date in respect of all transactions with PFF under the 1992 Master Agreement. 55. 56. 57. 58. 59. 60. 61. 62. On 16th February Klaveness sent PFF an invoice for the amount calculated in accordance with section 6 (e) (4) of the Master Agreement in the sum of $ 30,517,912.25. On the same day it claimed that sum from PM under the Guarantee. The make-up of the $ 30,517,912.75 is carefully explained in Mr Richter’s third statement. Although Klaveness has been put to proof as to quantum, no suggestion has ever been made that the calculation is wrong or unjustified and I am satisfied that it is justified. 63. On 19th March 2009 Klaveness’ Hong Kong lawyers made a claim by letter to PM for $ 10 million under the guarantee. 64. In those circumstances Klaveness claims against PFF: (a) $ 3,182,007.25 ($ 4,564,540.81 - [$ 702,997.31 + $ 679,836.24) plus (b) $ 27,335,905.00 making $ 30,517,912.25 in total. PFF’s claims 65. 66. 67. PFF claims that no sum is due upon the following basis. Clause 2 (a) of the Master Agreement makes it a condition precedent of any obligation to pay under section 2 (a) (i) that no Event of Default or Potential Event of Default has occurred. The December instalment of $ 702,997.31 was due on 5th January 2009. A cure notice in respect of Klaveness dated 6th January was served on 9th January 2009. Nothing happened to invalidate that notice, as a result of which there was an Event of Default in respect of Klaveness from 15th January onwards. Accordingly PFF was from that date under no obligation to make payment and, in particular, under no obligation to make a payment in respect of January which would otherwise have become due on 6 th February. As I have already held, the cure notices of 6th January were, in the light of Mr Chen’s e- mail of 13th January, ineffective. PFF further contends that, even if the cure notice was invalid there was at all material times and in any event before 6th February a Potential Event of Default constituted by the non payment of the December Sum due from Klaveness which, with the giving of a valid cure notice and the expiry of 3 London Business Days days thereafter would constitute an Event of Default. For that reason there was from 5 th January 2009, when the December sums became due, a Potential Event of Default in respect of Klaveness. I disagree. For the reasons that I have given I am satisfied that on 30th December an agreement was reached that the Settlement Sums for December 2008 would not be payable by Klaveness and Baumarine pending conclusion of the novation agreement. That agreement was supported by consideration since it was made on the footing that Klaveness would continue to negotiate the proposed contract of Novation despite the 68. 69. 70. 71. 72. fact that no such contract had been signed by 23rd December. It was also in the circumstances of benefit to PFF that such payment would not be made since such a payment would be inconsistent with the proposed novation, which was of potential value to PFF. Alternatively PFF was not, in equity, entitled to resile from its representation that the December payment was to be suspended. In order for the December Settlement Sums to become due it was necessary for PFF, either as a matter of contract or in order to terminate its forbearance, to give notice to Klaveness that payment was required. But it never did so. Even if all that PFF said was that it would not chase for the December amounts that would be enough to preclude it from contending that non-payment still amounted to a Potential Event of Default or that it was entitled to serve a cure notice. It could not, in equity, at one and the same time represent that it would not seek payment and rely on provisions of the contracts (Cure notice, Event of Default, Early Termination Date) which are only applicable upon the footing that the payment in question is due. In any event before 6th February the parties agreed that the two December Sums should be set off against the January sums such that by 6 th February there was no amount due from Klaveness which could form the basis of a cure notice leading to a Notice of Default. That renders it unnecessary to decide whether there is a Potential Event of Default if there is a non-payment which would only constitute an Event of Default if three things happened, namely (i) a cure notice was given and (ii) 3 London Business Days expired and (iii) no payment was made on any of those days. PFF suggest that the effect of Klaveness’ e-mail of 20th January indicating that, absent a signed agreement by 31st January, Klaveness expected a timely settlement, was that any agreement made for the suspension of the December payment or any forbearance shown was at an end. The December Settlement Sums, thus, became immediately payable and, not having been paid, there was a Potential Event of Default. I do not accept this. The e-mail of 20th January did not relate to the December amounts. It was a warning that, on the assumption that no deal was concluded by 31st January Klaveness would expect the January Settlement Sum to be paid on 6 th February. In any event it was followed by the agreement about set off of 5th February. Even if any forbearance in respect of the December Sums is to be regarded as coming to an end in the event of non-agreement on 31st January it would seem to me that Klaveness would be entitled to a reasonable time thereafter to pay the December Settlement Sums. A reasonable time would have been the 5 London Business days provided for in clause 8 of the FFA contracts. That would take Klaveness to 6th February. The effect of that would be that the December Settlement Sums became due on the same day as the January Settlement Sums. The amounts of both are in the same currency and due at the same date and accordingly that which was payable on 6 th February, so far as Klaveness was concerned, was the January amount owed to it less the December amount owed by it. 73. In those circumstances it is unnecessary to decide whether or not PFF was unable to pay its debts as they fell due as early as 30 th December 2008 or 5th January 2009. In the action Marine Trade S. A. v Pioneer Freight Futures Co Ltd [2009] EWHC 2656 (Comm) PFF conceded that from 6th February 2009 it was unable to pay its debts as they fell due. The Court has previously ordered that that issue is only to be tried after the remaining issues – if necessary. Conclusion 74. 75. PFF was in default in failing to pay anything in respect of January. Klaveness was entitled to serve (as it did) a cure notice, to fix an Early Termination Date, and to recover its Losses. Such a conclusion is consistent with what occurred at the time. It was not suggested in January and February that Klaveness ought to have paid the December sums; or that there was either an actual or Potential Event of Default on its part because it had not done so. Accordingly I propose to give Klaveness judgment against PFF for the amount specified in paragraph 64 above and against PM for $ 10 million. The latter sum is claimed both in action 2009 Folio No 233, which is against both defendants, and in the later action 2009 Folio 976, which is against PM only. The latter action was commenced in order to meet the objection made by PM that there was no valid letter of demand until the letter of 19th March 2009. The point is relevant now only as to interest and I invite submissions as to the date from which interest should run and on rate. 76. I am grateful for the efficient way in which the case has been prepared and presented. 22